Regulator is heading for the tightrope

The winds of change are blowing around the Financial Services Authority. Those who remember its predecessor - the Securities and Investments Board - will recall exactly the same miraculous conversion. The immediate prompt for change being the scathing criticism of its disciplinary processes in the wake of Legal & General's tough stance when the FSA fined it last year. This has led to reforms of those processes, but the new approach goes well beyond the narrow causes of that review.

When a team from the FSA came to the House of Commons to address the All Party Parliamentary Group on Insurance and Financial Services on the day FSA chairman Callum McCarthy unveiled the new approach, it was obvious that the days of dictatorial policymaking and sabre-rattling enforcement have at least been laid to one side, at least for now.

Education and co-operation were the twin themes of the FSA's response to the problems it has identified in the general insurance market.

Of most concern was the evidence of widespread non-compliance with the client-money rules and the poor communication between appointed representatives and their supporting networks. They did not rule out taking action if the situation did not improve. There was also a lot of sensible talk about priorities, with the need to clean up the selling of payment protection insurance moving sharply up their agenda, while the regulation of first-party claims handling has moved down.

All of this was welcomed by MPs and Peers who have previously been critical of the FSA's tough, unyielding approach. Typically, though, they were impatient for action to ensure that serious breaches of the client-money rules were detected early enough to prevent serious losses to customer, which could result in severe levies on the better-run firms. This is the balancing act the FSA now has to perform: it will win plaudits from the market for its new approach but, the moment something goes seriously wrong, it will be slaughtered by policymakers and the consumer lobby for being too soft.